By: Dennis Norman
Dennis Norman
Over the past few days I have heard stories of people that have lost their homes through foreclosure and then, as if that was not enough, were told by their tax preparer that they owed thousands of dollars in taxes for “forgiven debt”.
As bad as this sounds it is reality…or at least was reality. Let me give a quick example….You bought a home for $150,000 back in 2000….during the boom it’s value shot up to $300,000…..you need money for the kids college so you refinanced and borrowed $240,000 on your home, or $90,000 more than you actually had “in” it. Unforutnately a few months later you lose your job, can’t make the payments and the lender forecloses on your house. At this time you would normally be olbigated to pay income tax on the $90,000 you borrowed in excess of your cost.
Talk about a double whammy….first you lose your house, then you get a huge tax bill from the IRS….ugh..
Fortunately this is not the case today. Thanks to the Mortgage Forgiveness Debt Relief Act of 2007, assuming you meet the qualifications, if you lose your home to foreclosure you won’t be facing the big tax bill from Uncle Sam.
In the stories I heard the persons tax preparer was not aware of this and therefore included the income reported on the 1099 from the lender for forgiven debt as income. Fortunately all that is necessary to receive relief from this act is to file an IRS form 982
If you lost a home to foreclosure in the past two years I would suggest you ask your tax preparer about the Mortgage Forgiveness Debt Relief Act of 2007 and make sure you ahve not paid taxes on debt forgiveness that you should not have.
The IRS has a publication that explains this in great detail if you would like to learn more click here.
Related Posts
- Will you owe taxes on a short-sale or foreclosure?
- What to do when you owe more than your home is worth
- Mortgage Programs Fall Short in Keeping Homeowners out of Foreclosure
- Tips from the Federal Reserve for avoiding foreclosure scams
- Tips to Avoid Mortgage Modification and Foreclosure Avoidance Scams
i am confused as heck by the insolvency thing….our bank fought with us on even allowing us to do a short sale because THEY thought we had enough money to keep the place.
We did not feel that we did…because if we had kept the conod we would have NOTHING left over at the end of the month after we paid all of our bills.
I lost my job and my income went from $18 an hour to unemployment which equaled $8.50 an hour. So with that drop in my income we could no longer afford the condo.
Does insolvency allow you to include all of your monthly expenses that you had at the time? Food, gas, utilities, insurance, etc?
I was just reading over all of these recent posts and I have to say that we really need to “rethink” the attitude toward this and how some of you feel in regards to investment properties.
To me it should not matter if the home that was lost was a personal residence OR an investment property.
AND the reason I think that is because UNDER NO CIRCUMSTANCES should someone be required to pay INCOME taxes on income THEY NEVER GOT.
Think about that!
That is like saying that it is ok for people to get taxed just because the state wants to tax them.
Would you allow the state to charge you sales tax for something you never bought? No, you wouldn’t.
People bought homes, some got bad loans, some had ok loans but lost a job, some people simply got in way over their heads…for whatever reason… but no matter how or why IT happened…they lost a home…they DID NOT make any income on that loss…so to make them pay taxes on money they DID NOT earn…is wrong no matter how you slice it!
Exactly my point Jason.
(a) “… less sympathy for those who walked away from homes but had enough assets to cover their upside-down positions” – so only pay CA tax.
(b) “… no sympathy for speculators who walked away from investment homes” – so pay CA and federal tax,
(c)And for everyone else (the ones who were insolvent) – do not pay any tax.
Almost fair don’t you think?
Coletta,
I don’t want to defend the FTB or IRS, but one exception would be people who bought their CA homes when prices were low, took equity out and spent it all during the property boom, and offloaded their homes during the crash. Effectively they did earn income from the homes since they never had to repay the equity they took out. The situation is totally different for people who kept equity in their homes and refinanced to get a better rate – they also had recourse debt and shouldn’t be penalized like the first group.
Jason,
One counter-argument is that CA was quite willing to follow the federal mortgage debt relief act in 2007 and 2008. If they were willing to do that for those two years, why should people be penalized in 2009 (and beyond) because of the state’s current financial woes?
The second paragraph was meant to be addressed to Nerses
I like the point that you make jason….2007 & 2008 NO ONE had to pay taxes….now people do! THAT is just wrong!
Here is a scenario for you:
My brother lost TWO homes. He owned a small condo in San Diego. It was his personal residence for several years and he had a great job. That job transferred him to Chicago. He rented out his San Deigo condo, moved to Chicago and rented for awhile. Ended up deciding to buy a house there because he thought he would be in Chicago for 5 years or more. His finances were in great shape. ONE YEAR after being transferred to Chicago (2008) the company laid him off….and his renter in San Diego bailed on him. He looked for work, he tried to get a new renter for his condo. Both things failed.
By the end of 2008 his savings was drained and he still had no new job. First he lost his Chicago home and when he tried to work out an agreement with the bank to somehow keep his San Diego condo they told him no. He lost everything because he lost his job. LUCKILY, it was in 2008 so he doesn’t owe any taxes on all of this…BUT had it happened in 2009 he would to California.
He didn’t go into either purchase as an “investor”. He was at a good place in his life and then it all went to hell.
My point is, that there so many scenarios that could have happened to cause people to lose their homes…..if your loans are soley for the purchase of the home and you DID NOT take out cash and go all willy nilly buying shit…then you should not have to pay taxes on the loss of the house.
INCOME taxes should not have to be paid on income you DID NOT earn.
this is my last comment on this…sorry to ramble…
you also need to realize that investors are already paying taxes on the “investment” homes. Any rental money that they got was taxed as income and taxes were paid on that.
So now those people are being told to pay double taxes; taxes on the income, they really did get, from the renter, and taxes on income, they didn’t get, when it was sold in a short sale.
Listen, I understand that some people took full advantage of the system and bought half a million dollar homes when they only made $35,000 a year or decided to become house flippers and then walked away when the market went sour….but everyone of those people, there are people like all of us on this site that lost our homes because of a job loss, or other financial issue…to me it does not matter.
I feel that no matter how, what, why, or when it happened…to expect people to pay INCOME tax on money that they did not earn is just wrong and in my opinion…ILLEGAL!
If it is allowed to happen it sends a message to the American people that we can taxed at anytime for anything…whether we really owe the money or not!
newest info:
http://dist05.casen.govoffice.com/index.asp?Type=B_PR&SEC={E9650A38-1258-46F3-AE35-DF862FD66D02}&DE={C0E42705-F2F6-464B-9F57-3A595587E110}
Look Guys, it’s not that I am for taxing, I am simply saying that “insolvency” somewhat justifies it. I am hoping that “insolvency” will save me from my CA tax too.
Coletta, if you brother lost his job in, for example 2000, he would have paid not only state but also federal tax. So we should look at 2007 and 2008 more of an exception than 2009.
Also, we should look on the other side of the story: if your brother made money on his Chicago house for up to 250K (for single and 500K for married) then he did not have to pay taxes on his gain.
There are so many now…I don’t know which one is the most current:
There is a new bill AB1779 (Introduced by CA Assembly Member Niello, February 9, 2010) which will be in assembly on March 12. All home owners who lost their property must contact their local assembly member and request them to support this bill. The objective of the bill is to extend the tax forgiveness in State of CA till Jan 01, 2013. If the bill fails thousands of home owners who lost their property in 2009 will end up paying tax to CA FTB for their cancellation of debt 1099C sent by their mortgage companies.
Website to find the local assembly member:
Your Legislature (http://www.leginfo.ca.gov/yourleg.html)
The pdf version of the BILL #: AB1779 can be found at the below location
http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_1751-1800/ab_1779_bill_20100209_introduced.pdf
Well, if I figured the worksheet correctly, we are insolvent by over $108,000.
Thank god!
We were insolvent by a similar amount. Dumb question: if you do claim insolvency to avoid the phantom COD income, do you have to file any additional forms with your federal tax return to prove insolvency? Also, are you more likely to be audited by the IRS?
Jason
I haven’t started RE-doing my taxes yet, but the insolvency worksheet says to keep for YOUR records. I see nothing to include with the actual taxes. I am very interested to see if there are additional papers to file with IRS or State though. I am going to wait a bit longer to actually fully prepare & file my taxes to see what new things may happen in regards to all of this stuff.
Not sure if we are more likely to get audited or not. My income vs. others is low and they wouldn’t get any money outta me if they did audit me. But who knows at this point.
From facebook group The Peoples Page 1099-C:
Update on SBX8 32 from Senator Wolk’s office…. it’s passed committee, and it was sent to the Assemby where it was held at the desk and then referred to the Committee on Revenue and Taxation On February 22. Apparently this is a “good” thing. If you have questions for the Com on Rev and Tax you can call 916-651-4119. …Good luck everyone, this one seems like it’s the only alternative for me since we just refinanced and did not short sale / forclose.
http://www.leginfo.ca.gov/pub/09-10/bill/sen/sb_0001-0050/sbx8_32_cfa_20100224_091411_asm_comm.html
From Timmer Herdt, Sacramento reporter for the Ventura County Star:
Just talked with Sen. Wolk. She said her bill got out of Assembly Appropriations today and is likely to be taken up by the full Assembly on Monday. Because of the other conformity issues, however, there is heavy opposition from some business groups, incl. Calif Manufacturers and Technology Assn. It’s li…kely this will become part of the umbrella discussions on midyear budget actions, which probably means the governor’s office needs to hear from people such as yourself.
Hi,in our case, we didn’t end up in foreclosure, but we had loan modification and lowered the interest rate, and all of the changes are made based on the new and lowered property value. Of course, the house is our principal home, not a investment. And in the 1099-C we have the box 5 in matter as Yes marked. Should this case also be Non Recourse Loan and have it marked as No? Thanks in advance.
Repost. I would appreciate if there is anyone would know if the loan canceled due to modification of principal and interest rate is recourse loan or not. Thanks Again.
MIG..i asked around and if the original loan was a non-recourse loan, then it is my understanding that the modification should also be a non-recourse.
Thanks Coletta, I asked GMAC, and the lady will answer me back around next monday and confirm either if the canceled debt was Non Recourse or not.
my fingers are crossed for you!
Hi Coletta, I just found out from GMAC that the loan before and after Loan Modification are Non Recourse. Now, I need to tell GMAC that either 1099-C shouldn’t have been sent out or have the box 5 as No. By chance is there any link from IRS that mention such that in case of Non Recourse Loan what supposed to be done? And secondly is there any link for FTB or CA saying that case of Non Recourse Loan the forgiven amount is non taxable income? Thanks Again. – Miguel
I did further analysis of the IRS Publication 4681 and it seems correct that GMAC has issueed 1099-C with check box # as Yes for the Loan Modification situation. This is because as follow: IRS PUB 4681 define that “If you are not personally liable for the debt, you do not have ordinary income from the cancellation of debt unless the lender offers a discount for the early payment of the debt or agrees to a loan modification that results in the reduction of the principal balance of the debt… ” Later in the section “Discounts and loan modifications” describes that “If a lender offers to discount (reduce) the principal balance of a loan if the loan is paid off early, or agrees to a loan modification (a “workout”) that includes a reduction in the principal balance of a loan, the amount of the discount or the amount of principal reduction is canceled debt whether or not you are personally liable for the debt.The amount of the canceled debt must be included in income unless certain exceptions or exclusions apply.” Therefore as a result of this definitions, the only solution for my situation is the comformity of CA State to the The Mortgage Forgiveness Debt Relief Act. And the loan being Non Recourse or Recours becomes secondary subject in the case of Loan Modification. Since I am not tax expert, I would appreciate if anybody can confirm and that would be great. Thanks.
Mig
The bank is correct in sending out the 1099-C.
The issue is box 5.
Box 5 asks if the borrower is liable for the debt.
This is in reference to the canceled debt, not the actual home loan.
On a non-recourse loan, box 5 would be checked no. NO because YOU the borrow are not liable for the debt. (the cancelation debt)
Hi Coletta, I am in contact with GMAC and they are asking if there is any specific tax legislation doc that state that the check box # should be No. Their position is that it is correctly done. By any chance do you know how or from where I can get it? Thanks
Hi Mig
I have searched for actual written info specific to box 5 and can not find any. I started my battle with my bank after I spoke to the IRS. They are the ones that told me that box 5 should be checked no on a non-recourse loan, and that it was up to me to get the bank to correct it.
Box 5 is what is causing the tax problem and GMAC and ALL OTHER banks know this and I am disgusted that they are playing dumb on the issue.
My bank also told me that box 5 should be no and they would correct it.
However, NOW they are saying that since all laws in regards to this are geared toward foreclosures and do not mention short sales, that they may not correct my 1099-C after all.
But THAT is a whole other issue.
Hi again, and Thanks for the prompt response. Also GMAC has asked me if there is any California legislation document that would say that if it Non Recourse Loan, the canceled debt is not taxable income.
As you said, all this is frustrated process… Thanks again.
Did further reading of IRS Pub 4681 on exclusion of canceled debt as ordinary income that stays as follow “”… You can exclude canceled debt from income if it is qualified principal residence indebtedness. Qualified principal residence indebtedness is any debt incurred in acquiring, constructing, or substantially improving your principal residence and which is secured by your principal residence. Qualified principal residence indebtedness also includes any debt secured by your principal residence resulting from the refinancing of debt incurred to acquire, construct, or substantially improve your principal residence but only to the extent the amount of debt does not exceed the amount of the refinanced debt. ”
Based on this, I think the 1099-C shouldn’t have been issued since despite of the canceled debt is a ordinary income, it becomes excluded of being treated as such resulting non ordinary income with no need to issue 1099-C. Well this is my interpretation that I have told to GMAC. Let’s see what happens.
Mig
Your bank is full of idiots OR people pretending to be idiots!
Are they in the state of CA?
Here are multiple links that state that non-recourse loans do NOT result in Cancellation of Debt Income:
From: http://www.businessfinance.com/nonrecourse-debt.htm
Nonrecourse debt – A secured loan with no personal liability.
A nonrecourse debt is secured by some form of collateral, under which the borrower has no personal liability. If the loan defaults, then the lender only claims the collateral. The borrower’s liability is limited to the collateral put down for the loan. If the collateral is less than the amount still owed when the loan defaults, it is a loss for the lender.
From: http://www.irs.gov/newsroom/article/0,,id=174034,00.html
Non-recourse loans: A non-recourse loan is a loan for which the lenders only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.
Taxable cancellation of debt income. (Note: As stated above, cancellation of debt income is not taxable in the case of non-recourse loans.)
Step 1 – Figuring Cancellation of Debt Income. (Note: for nonrecourse loans, skip this section. You have no income from cancellation of debt.)
From: http://accountant.intuit.com/practice_resources/articles/tax/article.aspx?file=tmdd_1099C-2009
If a client is not personally liable for the debt (nonrecourse), the cancellation of debt does not result in COD income unless one of the following conditions exists:
1. The lender offers a discount for the early payment of the debt [Rev. Rul. 82-202].
2. The lender agrees to a loan modification that results in the reduction of the principal balance of the debt [Rev. Rul. 91-31]
From: http://www.ftb.ca.gov/professionals/taxnews/2007/1007/1007_3.shtml
In California, purchase money mortgages, which are mortgages where the borrowed funds are used to purchase the house, are generally treated as non-recourse debt.
Just spoke to Collin Gornell at the Senate Revenue & Taxation Committee. 1-916-651-4119. He gave me an update on this issue in language that the basic person can understand.
This bill is similar to many out there but it is the farthest along in the process.
It it a part of a large bill and within that bill is one issue that caused the veto in the past. It has to do with Baseless Refund Claims. SOOooooooooo that could also cause the bill to get vetoed this time.
If all goes well…this bill should be on the govenors desk within 2 weeks. Then we just wait and see what he does with it.
NOW..let me add this little tidbit of info…in my conversation with Collin I brought up the issue, that most of us are having, that the banks are sending us out incorrect form 1099-C. He cut me off before I even finished my sentence and said that non-recourse loans shouldn’t even be getting a form 1099-C. I am now waiting to see if there is something that he can provide that we can then show to our banks to MAKE THEM correct and/or remove these FALSE forms.
I checked out that link mentioned above and it appeared to be down. Did anyone else have that issue or is it just me?
Terrance…the link is working for me on the news story.
http://www.vcstar.com/news/2010/feb/28/governor-to-decide-tax-fix-for-short-sales-may/
Coletta,
I would like to thank you for all your hard work. The links and constant follow-ups are very valuable information to all of us.
Nerses
thanks to you too….we all need to stay on top of this!
woo hoo…i will pass this news along!
thanks to everyone on here is kicking butt at getting the word out and staying informed!
we shall prevail!
I finally got somewhere with my 2 months of persistance!
The California Bankers Association was able to help me. They contacted the VP of Pacific Capitol Bank (the same man that I sent multiple letters to) and I WILL BE getting corrected 1099-C forms. This is from the mouth of the VP.
The bank is to call me today and I am to call Jason Lane at the California Bankers Assocation on Monday if I have not heard from the bank.
The California Bankers Association is a trade association that banks pay to be a part of. (Actual banks, not financial lenders such as GMAC, ING, etc.) Because my mortgage was from an actual bank, I was able to get this association to look into this matter for me.
If your mortage was through a Non-depository institution, the association will not be able to help, because they do not regulate these types of lenders. You will need to contact the California Department of Corporations and find out WHO regualtes non-depository institutions. I called the number that I have for them, but they are closed on Friday. 1-213-576-7662.
I will not fully beleive that my situation is resolved until I am holding the corrected 1099-C in my hand but at least now I have some hope.
You HAVE TO BE PERSISTANT.
I have been on the phone and or internet since January and I have mailed out letters to everyone I could think of.
PUSH PUSH PUSH until people are sick of you.
We will ALL get this resolved!
good for you..but the main topic for this site is for getting the law passed…finding alternatives will only weaken the resolve for the bills being submitted for passing…
true!
but if the banks would send out CORRECT forms to begin with, then thousands of people, who had non-recourse loans, would not have to sit around and wait for a bill to pass.